•QOD # 20: “ .” •CH 7 GC Notes AGENDA Tues 3/7 & Wed 3/8 of Perfect Competition •Many...

AGENDA Tues 3/7 & Wed 3/8• QOD # 20: “Stupid is as stupid does.”• Review HW (pg 176 #1-5, 184 #1-5)• CH 7 GC Notes• Perfect Competition• Monopolies• Taste Tests • Monopolistic Competition• Oligopoly• HW: pg 189 #1-5; pg 195 #1-5

– Study for Market Org Quiz 3/13– Business Plan or Stock Selection DUE 3/13

QOD #20: “Stupid is as stupid does.”As you watch the clip from “Forest Gump,” note the process

related to Bubba Gump Shrimp’s position in the shrimping market.

1. Before the hurricane, how does the shrimping industry resemble a perfectly competitive market?

2. How does the hurricane change the market price and quantity of shrimp? (Use supply & demand graphs to illustrate.)

3. How did the hurricane create a monopoly for Bubba Gump Shrimp? Use the characteristics of a monopoly to support your answer.

4. Do you think Forest can maintain his monopoly status over time? (In other words, are there barriers to entry?) Explain.

Chapter 7: Perfect Competition

Characteristics of Perfect Competition

• Many buyers and sellers.• All firms sell identical goods.• Buyers and sellers have all

relevant information about prices, product quality, and sources of supply.

• There is easy entry into the market and easy exit out of the market.

Perfect Competition

• A market may not satisfy one or more of the four conditions and still be perfectly competitive

• What determines whether a market is perfectly competitive or not is if firms (sellers) in the market are price takers.

Price Takers• A price taker is a seller

that can only sell its output at equilibrium price.

• A firm produces Q at which MR = MC at E (equilibrium price)

• Price takers will not sell for less than equilibrium.

What does a perfectly competitive firm do?

• It produces where marginal revenue equals marginal cost.

• MR = MC• It must sell its product

at equilibrium since it is a price taker.

Profit in a perfectly competitive market

• Profit acts as a signal to firms not in the market to enter the market.

• As new firms enter the market, they increase the supply of the good that is earning profit, and thus lower its price.

Chapter 7.2: Monopoly

Characteristics of monopoly• There is one seller.• Sells a product for which

there is no close substitutes.• Extremely high barriers to

entry into the market.

Barriers to Entry• Legal Barriers

• public franchise: ex cable TV• patent: 20 year exclusive rights to manufacture• copyright: intellectual rights of authors, artists

• Extremely low per-unit costs• so low that it keeps competition away• natural monopoly

• Exclusive ownership of scarce resource• A monopoly seller is not guaranteed profits.

• Price is limited by the demand curve for the product.

Government & Market Monopolies• government monopolies refer to monopolies that are

legally protected from competition

• market monopolies refers to monopolies that are not legally protected from competition

• natural monopolies exists when there is only one seller due to low average total cost.

• The monopoly firm is a price searcher.

• The price searcher can choose from various prices.

• The monopoly firm will produce where MR=MC.

• Will charge the highest possible price that it can sell all its output.

• Searches for the best price through trial and error.

Taste Tests• Your task is to analyze each of the products to

determine which is the brand name item.– In your team, SHARE some of each of the (A & B)– SHARE some of each of the(A & B). – SHARE some of each of the(A & B). – Finally, examine each of the (A & B).

• Consider texture, color, and taste.• Last, select which of the two products (A or B)

would be the higher priced item.

Results of Price CheckProduct A

• Sparkle Paper Towels • (48 sheets/38.1 sq. ft.)• $8.62 for 8 rolls = $.0224/sheet

• Cheese Nips• (11 oz.)• $1.78 = $.162/oz

• Choco-crisps• (22.5 oz)• $3.50 = $.155 /oz

• Kellogg’s Apple Jacks• 26 oz• $4.58 = $.176/oz• Your turn: Ziploc vs.

Product B• Mega Roll

• (140 sheets/58.81 sq.ft.)• $.98/ roll = $.007 sheet

• Cheeze-Its• (12.49 oz.)• $2.88 = $.232/oz

• Post Cocoa Pebbles• (202.5 oz)• $3.50 = $.171 /oz

• Great Value Apple Blasts• (21.7 oz)• $2.93 = $.135/oz• Great Value snack bags

Monopolistic Competition The Characteristics of Monopolistic Competition

1. there are many buyers and many sellers2. firms produce and sell slightly differentiated products 3. there is easy entry into and exit from the market4. Price searchers– sell slightly different products – produce Q when MR = MC– sell at the highest price at which they can sell all of their output

How are Monopolistic Competitor’s products different?

• the product itself may actually or appear to be different in some way– Differ by location, service or perceived quality

• Location: gas station / convenience• Service: Nordstrom / Supercuts• Perceived quality: Hamburgers / Clothing

Competitors and Monopoly• Many businesses would like to become a

monopoly– they advertise perceived differences

• Competition depends on two factors:1. How close to unique the product is2. How easy it is for sellers to enter the market